BEPS 2.0: progress and setbacks

The preparation of BEPS 2.0, new rules for the taxation of the digital economy, has made some progress. Preliminary consensus has been reached on Pillar 1, defining a new rule according to which income will be taxed in the state of sale even if the seller has no physical presence there. However, the USA’s requirement that the new rule be only applied on a safe harbour basis complicates the matter, as it is unacceptable for the majority of other states. This may threaten the project’s planned completion deadline, set for the end of 2020.

In the December issue of Tax and Legal Update, we discussed the OECD’s BEPS 2.0 proposal, aiming to amend the existing rules for the taxation of income based on physical presence (Pillar 1), and introduce a minimum tax for multi-national groups of companies (Pillar 2).

Taxable income will be allocated to the state of sale via a three-tier mechanism (Amount A, Amount B and Amount C), reflecting the existing profit allocation principles based on physical presence.  Newly defined Amount A, however, will enable the taxation of profit generated by a foreign company even if it has no in-country physical presence contributing to the generation of income from a sale. To some extent, this principle may replace the digital tax that has recently been introduced by many countries. However, Pillar 1 rules would not only apply to income from digital services, which is the income targeted by digital tax (the performance of targeted advertising campaigns, the use of multilateral digital interfaces, or the sale of user data), but also to income from the sale of goods and services generated directly in the state concerned. Unlike the digital tax that is usually applied on an entire income, the new Pillar 1 rules would enable the taxation of only the profit amount allocated to the state of sale determined based on Pillar 1 rules.  Pillar 1 rules should also apply to corporations that are part of groups with a turnover exceeding EUR 750 million. This shift within Pillar 1 was supported by the ministers of finance and governors at the G20 summit in Saudi Arabia. 

A big question mark hangs over the USA’s position in this matter. As early as in December 2019, the USA proposed to transform Pillar 1 into a safe harbour regime, which would allow corporations to choose whether they want to proceed in accordance with Pillar 1 or with current transfer pricing rules (the safe harbour model does not affect Pillar 2). According to the OECD representatives, the USA stand alone in pursuing this model. Consequently, the OECD announced in the report that it is ready to consider the proposal but will not do so before the completion of the original Pillar 1 plan. This should occur in July, which means a considerable delay, as the original deadline was set for the end of January. 

It is not at all certain whether the BEPS 2.0 project will be completed by the end of 2020 as was declared at the G20 summit. This may influence countries that consider the implementation of digital tax or its cancellation if they have already implemented it. Their decisions are conditional on a consensus at the OECD level. 

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